Dana Elman is a business consultant, SME professional, and social entrepreneur with six years of commercial and policy research experience focusing on access to finance. Dana has studied the UK’s social and environmental investment market since 2014 and worked at the LSE Marshall Institute for Social Entrepreneurship and Philanthropy, following a period at Deloitte consulting for large enterprises and SME manufacturers.

Dana’s paper, Why have UK pension funds not taken on social impact investing, is published in the 2017 edition of The Public Sphere, available to read online here. This piece is part of a series of articles contributed by authors featured in this year’s issue.

In times of government decentralisation, while Brexit has been clouding over the UK’s public affairs, four UK pension funds have invested more than 1.3 billion GBP of total assets in social and environmental impact investments in 2015. But the UK government is arguing that pension funds have not taken on social impact investing.

Pension funds are the largest asset owners in the UK economy and are legally obligated by fiduciary duty to maximise financial returns. I assumed pensions acknowledge their influence on society and the planet too, and asked in my paper why have they not taken on impact investing?

I argued that fiduciary duty is not the most critical reason holding back pension funds, and tested the hypothesis that pensions invest less when transaction costs of impact measurement are high.

My interviews with policymakers and investors showed that indeed some barriers exist and pensions are holding back from impact investing, for reasons such as weak branding with pension managers, lack of incentives to engage with the industry, or lack of interest from clients. My analysis firstly demonstrated that there is no monetary target for the UK impact investment market, resulting in a policy void. To test my hypothesis, I designed a case study on the Investing for Growth initiative, a consortium launched in March 2013 by five UK local government pensions, and on the asset allocation of its leader, Greater Manchester pension fund. I expected to find that sharing the due diligence, including impact measurement costs, would result in an outcome where joint-investing is preferable over independent investing. But while collaboration between investors may lead to reduced costs and risks, in contrast to individual investments, the initiative was not successful, and ended in 2014 due to specific barriers. Some of them were: (1) current opportunities offer small size deals and below the average investments; (2) trustees and fiduciaries’ workload in other areas has greater priority, etc.

Surprisingly however, I found that Greater Manchester continued to invest alone in impact investment while arguing that its fiduciary duty was not jeopardized even when transaction costs rose. This was a refreshing statement, which perceives fiduciary duty as linked to participation in economic growth of the greater Manchester communities. I found evidence that supports my primary hypothesis – Greater Manchester is not holding back due to its fiduciary duty. However, I concluded that transaction costs are not a limiting factor when a PF is keen to engage with impact investing. Hence, I reject my hypothesis that high transaction costs limit pensions from impact investing.

Through my findings, I discovered more potential factors that may explain why many pension funds still hold back from impact investing, and I believe that more research will bring better understanding and open the discussion beyond restricting it to fiduciary duty.

My findings show that the burden of financing social services and environmental outcomes is gradually shared with private hands, and particularly with investment managers across institutional investors. I also found that barriers to impact investing are diverse, and the lack of standards in financial reporting on this type of investment should be fixed to produce better clarity.

Investors have been recognizing their power to support sustainable economic development while making profits. Some do so only by factoring social, environmental and governance (ESG) risks in their decision-making process before each investment, while others take the long-term vision and engage with social or environmental impact investing.

Making smart decisions requires taking responsibility. When a pension fund excludes Volkswagen for the environmental reason, we should all be carefully optimistic. Positive change is taking place, because more capital is channelled towards responsible investments that do not harm the environment. It is encouraging to hear about long-term investors withdrawing millions of Euros and Dollars and British pounds from businesses that do not care about their environmental implications. However, I hope to hear about more pensions such as Greater Manchester, who are taking on social and environmental investments, with an intention to generate positive financial return while solving problems in our planet and addressing societal challenges.


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